Category Archives: Free Courses

Analyst Course


  1. Prior mentions of an analyst course with readers’ suggestions were posted:

http://csinvesting.org/2017/03/10/a-strategy-for-resource-stocks-investing-course/

http://csinvesting.org/2017/03/15/update-on-analyst-course-part-1/

http://csinvesting.org/2017/03/17/update-on-analyst-course-part-2-readersuggestions/

There are plenty of other investing courses ranging from free to $20,000.

http://www.tradingacademy.com/ Here you can learn technical analysis and trading techniques for $5,000 to $20,000.  I won’t say this is a scam, but you won’t learn anything than you could find in a $20 book on technical analysis.  Then ask yourself if and how technical analysis has ANY value?

https://www.udemy.com/value-investing-bootcamp-how-to-invest-wisely/  A typical $200 course for beginners.

http://www8.gsb.columbia.edu/execed/program-pages/details/61/VI ONLY $7,200 for three days.  Learn from the famous Prof. Greenwald.  How can you be a value investor and then pay that amount?

https://www.quora.com/What-are-the-best-online-value-investing-courses Look for yourself.

Stamford online value investing course

Columbia_VI_Executive_Summary

Columbia_VI_Sample_Agenda

http://pages.stern.nyu.edu/~adamodar/ FREE. But even an “expert” like Prof. Damodaran can make critical mistakes as pointed out here: http://csinvesting.org/tag/vale/  You must understand economics, banking, and credit cycles!

https://youtu.be/_uQjGz6jp2E?list=PLF1wHLfTCGUQ85w90LIg-1YXZdnUKOGtO 91 short lectures on Buffett.   Not bad.   A good supplement to your readings of Buffett.

https://youtu.be/Jo1XgDJCkh4   M. Pabrai opines about value investing. How to invest in 100-baggers.  I think Mr. Pabrai will beat the averages, but he has had 80% declines in his portfolios (2008/09).  Learn the proper lessons and NEVER cease thinking for yourself.

What Can I Contribute?

Based on my research, I still believe there is a place for a serious, rigorous, and a comprehensive course and resource center to help investors be better independent thinkers and analysts of businesses.  Over twenty-five years, I have collected a huge array of investment writings, case studies, lectures, etc. that would help serious investors–the equivalent of four graduate level courses on investing.  Why pay $60,000 per year to go to graduate school to learn value investing.   Well, students pay the $60,000 for the name brand, the certificate and the relationships with other students. Not a apples-to apples comparison–to be fair.

The issue now is organizing and reformatting the material so both beginner and expert can improve.  My bias is to learn from great investors from theory to case study.   There is nothing new investing that hasn’t been said  before by Buffett, Graham, Klarman, and Jesse Livermore. Why not learn from them instead of from a flatulent, tenured business professor (ironic?!).

While at college, I worked as a pilot. Learning to fly used the theory of flight that the student applied in good, day-light weather with a flight instructor, then progressing to independent flight.  Even Munger says the process of flight training is efficient.

A Craft

Investing is a craft or both an art and science. You need the expertise and experience to place facts, information into perspective.   An investor must understand how capital is allocated by management (Corporate Finance). Take dividends.   There are many perspectives to view dividends, but dividends are paid out of FREE CASH FLOW.   So what is free cash flow and how can we know if it is sustainable?  To understand that you must convert accounting information into underlying reality.  An entire 412 page book is devoted to all the issues surrounding sustainable free cash flow, http://160592857366.free.fr/joe/ebooks/tech/Wiley%20Creative%20Cash%20Flow%20Reporting.pdf

You understand the details but you should not get lost in minutiae because you must focus on what is important and applicable to the opportunity.

Therefore, the course will need to cover the basics like:

  • Does value investing work?
  • Important concepts: How to read, how to think. How to learn.
  • Studying great investors as they apply value investing principles.
  • How to value businesses.
  • Analyzing competitive advantage or disadvantage.
  • When to concentrate and bet heavily/using options, stubs.
  • Subsets of value investing: Growth, special situations, and distressed.
  • And many other skills

You must know:  (1) how to value a business and (2) how to think about prices.  The devil is in YOU and the details.

You either buy an undervalued asset/non-franchise business that is subject to reversion to the mean (growth doesn’t add value)  or

You buy a franchise that depending upon its moat has slower reversion to the mean.  Growth is valuable within a franchise.

The course will take students through those two types of investments with case studies. Students then can refer to Buffett, Graham and others who applied value investing.

One goal would be to help students develop their OWN investment philosophy.

How to SEARCH, VALUE, MANANGE A PORTFOLIO, and IMPROVE THE YOU are involved in having a comprehensive investment philosophy. You will have a library of investors’ different approaches and philosophies.

I probably need four to six months to put the course together.  Several of you have kindly offered to help. I appreciate your interest, and I will reach out at the appropriate time.

The goal will be to have a resource for students to build a strong foundation of skills and knowledge with an area to communicate with one another.

All for now.

Case Studies on Buffett’s Investing: NYU Course This April

 The Fundamentals of Buffett-Style Investing

Learn the investment techniques of Warren Buffett, the world’s most legendary investor. Examine case studies of Buffett’s acquisitions in order to review the real-world principles that the “Oracle of Omaha” uses to pick companies. Topics include both quantitative methods, such as valuation metrics and cash flow analysis, as well as qualitative principles, such as competitive advantage and economic moats. As a final project, partner with a classmate to present a publicly traded company you believe Buffett would buy. At the conclusion, understand what Buffett means by a “great business at a good price.” This course is appropriate for beginners in the industry and for individuals with a broad array of backgrounds. The final session is taught synchronously from the Berkshire Hathaway annual meeting in Omaha.

More details

You’ll Walk Away with

  • An understanding of the investment techniques of Warren Buffett, the world’s most legendary investor
  • The opportunity to present a publicly traded company you believe Warren Buffett would buy

Ideal for

  • Students with little to no knowledge of investing
  • Professionals across the experience spectrum in regard to investing

READ:

CSInvesting Editor: Let me know if you attend.  Several readers took the class last year and enjoyed it.

I received this email:

Dear Mr. Chew,

You were very kind last year to post a notice about our Buffett investing class on your website.  We had several students from your site, all of whom were excellent and dedicated. According to end-of-semester student surveys, the students enjoyed the class quite a bit. You clearly attract a high caliber of investor to your online community. We would be very grateful if you would consider posting a notice of this year’s class, which starts April 1st.
See below:
New York University’s School of Professional Studies is offering an online class focused on the time-honored techniques of value investing, as practiced by the world’s most legendary investor, Warren Buffett.
By examining case studies of Buffett’s acquisitions, students will explore the real-world principles that Buffett uses to pick companies. The class starts online April 1st and is open to the public for registration.
CONTACT INFO:

The instructor, James Berman, is available to answer questions. He can be reached at 212.388.9873 or jgb4@nyu.edu.

The INSTRUCTOR

If it’s about value investing, I’m interested. I run a global equities fund that invests in the United States, Europe and Asia. As the president and founder of JBGlobal.com LLC, a registered investment advisory firm, I manage separate accounts for high-net-worth individuals and trusts. As a faculty member in the Finance Department of the NYU School of Professional Studies, I teach Corporate Finance and the Fundamentals of Buffett-Style Investing. My book, Lessons from the Lemonade Stand: a Common Sense Primer on Investing, winner of the 2013 Next Generation Indie Award for Best Non-Fiction eBook, is a guide for the first-time investor of any age. I received a B.A. from Harvard University and a J.D. from Harvard Law School. My wife, daughter and I live in Greenwich Village where I find the lessons of value investing as useful with life as with money.

An article from the Instructor on Buffett

The One Word Missing from Buffett’s Annual Letter

 These days, can anyone tweet, converse or goose-step–let alone write 28 pages–without using the five letter word: Trump?

Warren Buffett just did.

As a value investing aficionado and Berkshire shareholder, I anticipate the annual missive from the Oracle of Omaha with bated breath. When it popped online today, I knew enough not to expect much commentary on the economic or the political. A secret to Buffett’s success has been an agnostic view on the too-many moving pieces of the macro scene. By avoiding the human obsession with the short-term and fortune telling, Buffett has always concentrated on the only thing that matters: buying wonderful businesses at fair prices. As Peter Lynch says: “If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.” I myself have found no other investing mantra more important.

But really? No mention of the greatest threat to the democratic process and the rule of law since Nixon–or beyond?

Geico is mentioned 22 times, Charlie Munger 17 times, hedge funds 12 times, table tennis once. Trump zero.

In April of 2016, Buffett went on record saying that Berkshire would do fine even with a Trump presidency. But that was at last year’s meeting–well before the election, and well before anyone thought it was a serious concern. And Buffett made some further post-election comments in December about still buying stocks, but this letter was his first major written opportunity to hold forth.

He even mentions the worthwhile contributions of immigrants but somehow never calls out Trump by name. Perhaps the silence is deafening. Buffett was an ardent supporter of Hillary Clinton in the election and his failure to mention Trump may be the most damning maneuver of all.

Or not.

Because if there’s one thing I wanted as a Buffett follower, it was a reasoned and sober commentary–refracted through the prism of his extraordinary, eminently sensible brain–on what this erratic, errant president means for our country, our markets and our lives.

James Berman teaches The Fundamentals of Buffett-Style Investing, an online class starting April 1 offered by NYU’s School of Professional Studies.

Buffett Warning

Where is he now? http://ericcinnamond.com/buffett-1999-vs-buffett-2017/

Buffett 1999 vs. Buffett 2017

This may sound awful coming from a value investor, but I don’t read Berkshire Hathaway’s annual reports cover to cover. I did earlier in my career. In fact, I’d eagerly await its release, just as many investors do today. However, over the years I’ve gravitated more to what makes sense to me and have relied less on the guidance from investment oracles such as Warren Buffett (see post What’s Important to You?).

While I know significantly less about Warren Buffett than most dedicated value investors, it seems to me that he has changed over the years. I suppose this shouldn’t be surprising as we all have our seasons. And maybe I’m the one who has changed, I really don’t know. But I remember a different tone from Buffett almost twenty years ago when stocks were also breaking record highs. It was during the tech bubble when he went out of his way to warn investors of market risk and overvaluation.

I found an old article from BBC News with several Buffett quotes during that period (link). The article discusses Warren Buffett’s response to a Paine Webber-Gallup survey conducted in December 1999. The survey showed that investors expected stocks to rise 19% annually over the next decade. Clearly investors were extrapolating recent returns far into the future. Fortunately, Warren Buffett was there to save the day and help euphoric investors return to their senses.

The article states, “Mr Buffett warned that the outsized returns experienced by technology investors during 1998 and 1999 had dulled them into complacency.”

“After a heady experience of that kind,” he said, “normally sensible people drift into behaviour akin to that of Cinderella at the ball.

“They know that overstaying the festivities…will eventually bring on pumpkins and mice.”

I really like and can relate to the Warren Buffett of nearly twenty years ago. If I could go back in time and show the 1999 Buffett today’s market, I wonder what he would say. I’d ask him if investor psychology and the current market cycle appears much different than the late 90s.

Similar to 1999, have investors experienced outsized returns this cycle? From its lows in 2009, the S&P 500 has increased 270%, or 17.9% annually. This is very close to the annual returns investors were expecting in the 1999 survey, when Buffett was warning investors.

Have investors been dulled into complacency? Volatility remains near record lows, with every small decline being saved by central banks and dip buyers. Investors show little fear of losing money.

Are today’s investors not Cinderella at the ball overstaying the festivities? It’s the second longest and one of the most expensive bull markets in history!

There are of course differences between 1999 and today’s cycle. While valuation measures are elevated, today’s asset inflation is much broader than in 1999. The tech bubble was extremely overvalued, but narrow. A disciplined investor could not only avoid losses in the 1999 bubble, but due to value in other areas of the market, could make money when it burst. Given the broadness of overvaluation in 2017, I don’t believe that will be possible this cycle. In my opinion, it will be much more challenging to navigate through the current cycle’s ultimate conclusion than the 1999 cycle.

The broadness in overvaluation this cycle makes Buffett’s recommendation to buy a broadly diversified index fund even more difficult for me to understand. Furthermore, given the nosebleed valuations of many high quality businesses, I’m not as confident as Buffett in buying and holding quality stocks at current prices. It again reminds me of the late 90s. At that time, there were many high quality companies that were so overvalued it took years and years for their Es catch up to their Ps. But these are important (and long) topics for another day.

Let’s get back to Buffett 1999. I find it interesting to compare him to Buffett 2017. Surprisingly, Buffett 2017 doesn’t seem nearly as concerned about valuations this cycle. Buffett writes, “American business — and consequently a basket of stocks — is virtually certain to be worth far more in the years ahead [emphasis mine]. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that. Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle.”

You can include me as a naysayer of current prices and valuations of most risk assets I analyze. Based on the valuations of my opportunity set, I’ll take the advice from another naysayer – the Warren Buffett of 1999. As he recommended, I plan to avoid extrapolating outsized returns and will not ignore signs of investor complacency. I plan to remain committed to my process and discipline. By doing so, when the current market cycle concludes, I hope to achieve two of my favorite Warren Buffett rules of successful investing – avoid losing money and profit from folly.

Take a Microcap Investing Course for Free

http://www.oddballstocks.com/2017/02/podcast-interview-plus-new-investing.html

I think Nate is an intelligent, self-taught investor who can teach us all a few things if we do the work.   Listen to the podcast.Hi, this is Nate Tobik.

More microcap podcasts here: https://planetmicrocap.podbean.com/

Another microcap investor:http://classicvalueinvestors.com/

An excellent interview on mineral economics and gold

Back to the future with gold BTTF_GoldMoney_Insights  Gold doesn’t create wealth but it can store it effectively for decades or centuries.

100 Baggers Seminar Today at 3 PM

http://www.mayermethod.com/video-3_erk862.html  or http://www.mayermethod.com   This Saturday, 3 PM Eastern Standard Time (New York City times)

A sign-in for email here: https://subscribe.bonnerandpartners.com/XBF1T135

I don’t know if this is a marketing gimmick, but Chris Mayer is the author of a recently updated 100 to 1 book. http://www.valuewalk.com/2016/02/a-review-of-100-baggers-stocks-that-return-100-to-1-and-how-to-find-them/

 


I listened for ten minutes to find out this was JUST a sales/ bait and switch scam to buy an overpriced newsletter.   Hurry now before the letter doubles to $5,000.  Give me a break!   How stupid do they think people are.  YOU can do better on your own.

I apologize for posting.   Not everything is worth your time.

Mini Course on Analyzing Gold/Silver Stocks (GSA)

Gold Stock Analyst
 CSInvesting: Yes, this is an ad/enticement to get you to subscribe to his newsletter, but John Doody is a top   analyst in the gold space.  You can use his same techniques yourself–if you are willing to do the work.

GSA Mini-Course No. 1

The three critical metrics for determining upside potential in gold mining stocks.

How do you sort through 1,000+ publicly traded gold mining companies to determine which ones are viable investments? After all, they all produce the same thing: gold.

In the informative four-minute video below, GSA-Top10 Editor-in-Chief John Doody describes three critical metrics he pioneered over 20 years ago that cut through the confusion and chaos of the gold mining market to reveal high-upside opportunities. Watch it, and you’ll understand how John’s pioneering evaluation approach has helped the GSA-Top10 investment method consistently outperform the S&P 500, the XAU index and gold itself ever since.

Mini Course 1

or https://secure1.goldstockanalyst.com/order.lasso?promoAdLoad=1&mailCode=MINI-COURSE-1&course=1

Are you a serious investor? Get the facts about the most successful gold investing strategy of the past 15 years!

Click here to view a 13-minute video that explains the powerful GSA-Top10 strategy in greater detail.

You’ll learn:

  • How GSA analysts sort through more than a thousand publicly traded gold stocks to find the handful with significant upside over the next 2 to 3 years!
  • How the GSATop10 newsletter makes investing and maintaining your winning gold stock portfolio virtually effortless!

Click here to download a free report on one of the GSA-Top10 companies — a $99 value!

You’ll see:

  • The deep research and thoughtful analysis that makes GSA the most respected and successful gold stock authority in the world!
  • The engaging format that makes complex information – and recommendations – easy to grasp!

Note: The GSA-Top10 newsletter is intended for serious investors who can commit a minimum of $10,000 to a focused gold stock portfolio for at least three years.

Other Blogs/Websites to Read; The Meaning Crisis

http://wertartcapital.com
Argonaut Capital
Bargain Magazine
Bristlemouth
Bronte Capital
Clark Street Value
Damodaran
Farnam Street
Keep on track
Marathon Reviews
Swiss financial markets commentary
valueandopportunity
https://foragerfunds.com/bristlemouth/value-traps-media-sector-nzme/#comment-7353

I downloaded several excellent articlues on the Capital Cycle from Marathon Reviews.    Search for and find other good sources, then let others know at the Deep-Value discussion board–go to http://csinvesting.org/2015/01/14/deep-value-group-at-google/

READING:

11 THINGS WE’RE READING OR WATCHING THIS WEEK
  1. Savvy owners, savvy investors? – Larry Sarbit
  2. The great unbundlingBen Thompson
  3. Amazon is eating the retail worldBen Carlson
  4. Aurelius on business, investing, lifeRavi Nagarajan
  5. Pabrai’s market-beating approach – Preston Pysh
  6. Cassandra’s songJohn Hussman
  7. President Obama on booksMichiko Kakutani
  8. Restaurant industry bubbleKevin Alexander
  9. A chat with Daniel Kahneman – Morgan Housel
  10. Knowing your investment boundaries – John Huber
  11. Letters: AnabaticArquitos | Askeladden | BronteD&C | Greenlight | GreenWoodJDPLMMOakmark | Pershing | VltavaWedgewood

The Meaning Crisis for College Students

Test for Investors; Do you have what it takes to be a value investor?

giraffs

Test yourself…………….

Each of four cards on a table has a letter on one side and a number on the other, but you can only see what is on the side facing up. What you see are two letters and two numbers:

A         4           D           7

Suppose the rule governing these cards is that if a card has a vowel on one side, it has an even number on the other side. Which two cards would you turn over to find out whether the rule is true? Take no more than twenty seconds.

Now go to the real world: Can you name at least two psychological/analytical errors that you see in this clip.

https://youtu.be/Cxjdj5_5yNM Take no more than 4.5 minutes–length of the clip. The investment bankers each have MBAs, CFAs, Accountng degrees etc. They are SMART!

Total time for test 5 minutes.

2016_templeton   Hand-out to go with the above talk in 2016.    A good discussion of the psychological strength needed to apply value investing principles.

Study Stoicism to Improve Your Investing and Your Life

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Objective judgement, now at this very moment,
Unselfish action, now at this very moment,
Willing acceptance, now at this very moment, of all external events.
That is all you need.

To me that captures the three disciplines (perception, action, will) very nicely. It tells you how to see the world, how to act in the world, and how to come to terms with the world. It is indeed all one needs. You could spend a lifetime trying to just live that quote.

Understanding Stoic Philosophy may help you as an investor maintain rationality, control unwanted emotional reactions, and develop clear thinking for better choices which is, after all, what investing is all about.

The essense of philosophy is that we should live so that our happiness depends on as little as possible on external causes. –Epictetus

http://modernstoicism.com/q_lesson_page/introduction-to-stoic-week/

  1. stoic-week-2016-handbook-stoicism-today
  2. philosophical-meditation
  3. the-stoic-philosophy-murruoft
  4. the-stoics-1975

Stoicism in six minutes

The Base Rate Book

nq161005

the-base-rate-view-by-mauboussin  I wonder if readers will find this useful.  We last discussed base rates here: http://csinvesting.org/2016/09/29/hedge-fundfamily-office-consulting-job/

 

Pitch the Perfect Investment

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Pitch the Perfect Investment

The Essential Guide to Winning on Wall Street

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icon-amazon

Pitching an investment idea is the life-blood of Wall Street analysts —whether at money management firms and investment banks or with CEOs to potential investors. Those who do it well win, and win big. Sonkin and Johnson teach professional analysts, sophisticated private investors and ambitious young analysts how to uncover the perfect investment and pitch it to critical decision makers, to advance their careers and increase their wealth.

No other book like this one exists. There are plenty of books that focus on investment strategy, company analysis and critical thinking. Yet, there is no book that combines investment analysis with persuasion and sales – in Wall Street vernacular—pitching. In our increasingly competitive world, being able to pitch your idea is becoming as critical as being able to find and analyze great investment opportunities. It is imperative to get clients or superiors to take action on your ideas. The teaching of this skill is sorely lacking on Wall Street. Pitching the Perfect Investment will present a two-step process: 1) finding the perfect investment; and 2) crafting the perfect pitch. The book will show that to be successful the reader will require two very different skill sets: the first is investment analysis and decision making; and, the second is persuasion and sales.

Pitching the Perfect Investment presents world-class insights into search strategy, data collection and research, securities analysis, risk assessment and management, combined with the use of critical thinking, to uncover the perfect opportunity for professional analysts, sophisticated private investors and ambitious young analysts as well as mergers and acquisition specialists advising clients, financial consultants and corporate financial analysis teams. Pitching draws from the disciplines of psychology, argumentation and informal logic. It instructs the investor analysts of all types how to craft this perfect investment into the perfect pitch. Pitching an investment is an essential skill to securing and then excelling at your job on Wall Street.

This is an essential skill for the ambitious young investment analyst looking to begin a career on Wall Street as well as the seasoned veteran discussing an idea on CNBC, and every investor in-between.


Aspiring analysts should be aware of this book, but I am not recommending  since I have not read it.   Common-sense writing helps.  Clearly state your thesis then provide supporting facts and risks. Done.  But if you can’t state your case to a child in less than a paragraph, then go back to your desk.

For example, Navigator Holdsings (NVGS) has a dominant position in handy-size petrochemical transportation and it trades at 55% of net asset value, its balance sheet and flexible fleet allows it to be profitable despite a perfect storm in the LPG shipping market. One of the most famous value investors, Wilbur Ross bought into NVGS at an average price of $8.73 over three years ago for a 50% stake.  NVGS is now 20% below that price. The current lows in freight rates due to A, B, C are unsustainable due to 1, 2, 3, therefore normalized rates will mean much higher values. Timing is, of course, uncertain, but there are considerations for building more US ethylene plants for export. NVGS has the dominant position for transporting that product which requires special handling (super low temperatures and pressure). Price is about 50% below asset value and earnings power value.

Probably too long-winded, but you get the point.

Beware the echo chamber http://graphics.wsj.com/blue-feed-red-feed/   A serious concern for your research. Scary.

More on psychology for contrarians.

Latest NewsJune 10, 2016 – We’re pleased to announce a new website launching in the coming week.  Please let us know any questions or comments about the transition.

June 08, 2016 – Check out our latest 1-hour free webinar “Trading on Sentiment Strategies to Profit from Media Analytics in Global Equities.”

Recent PressMay 14, 2016How To Time The Stock Market Using Media Sentiment — Ky Trang Ho Forbes


The World&39;s Greatest Stock Picker

Manny introduced himself to me as “the world’s greatest stock picker.”  He explained that one key to his success was that he only needed two hours of sleep a night.  He pored over details in every significant financial publication and in those quiet morning hours when all others slept, he let information percolate.  By the morning he had brilliant new insights into the industries and companies that were poised to outperform over the following months.  Some of the world’s top fund managers subscribed to his research, he told me.

I asked if his clients knew he was housed in prison, in solitary confinement.  He explained that of course they didn’t, and he asked that I kindly keep his secret.  He distributed his stock research through his secretary, who kept his office open.

In the intervening days I checked out Manny’s story.  Much was true – he was in fact publishing highly-regarded financial research to large AUM clients from prison.

On the surface his research analysis sounded brilliant – the creative ramblings of an out-of-the-box Wall Street-obsessed thinker.  But as we talked in depth it became clear that his thought process was laced with irrational and circumstantial connections. He was often confusing wishful thinking with objective analysis.  He was hypomanic, with grandiose claims and excessively optimistic projections.

As a psychiatrist I’ve worked with many people with grandiose delusions.  In each case the client has fixed beliefs that are contrary to reality – beliefs that guide much of their waking actions – beliefs that are entirely untrue.  Delusions aren’t limited to manic prisoners, in fact we spend most of our days navigating the world based on assumptions, many of which are entirely unfounded.  Because the financial markets are imbued with uncertainty, assumptions are more dangerous in that environment.  Regardless of the fragility in our collective understanding of markets, there are enormous payoffs for those who can discern reality more accurately.

In fact, academic research on trading models finds that most are delusional.  “Most of the empirical research in finance, whether published in academic journals or put into production as an active trading strategy by an investment manager, is likely false.”  ~ Campbell Harvey and Yan Liu, “Evaluating Trading Strategies,” 2014

This quote is particularly relevant to us at MarketPsych because we are restarting our trading business.  We’re currently trading a unique media-based machine learning strategy and re-registering as an investment adviser.  It has been a long road to find a strategy worth deploying capital into, and based on our prior experience, trading delusions can easily become enshrined in predictive models.

Today’s newsletter examines the nature of false beliefs among investors, how beliefs shift (with an Amazon case study), honest investment strategy development, and examines what, if anything, we can do to find the truth about what moves markets.


When Delusions Crack – Brick and Mortar Retailers

“Lose your smile and lose your customers.”
~ Sam Walton

(The following was written by our own Tate Hayes and a longer version will appear in Investopedia this weekend.)

Nordstrom’s and Macy’s have both seen a 50% drop in stock price over the last year on the back of deceasing revenues. Wal-Mart and Best Buy shares have taken just under a 10% hit over the last 12 months. In contrast, Amazon’s stock price is up almost 70% in the last year and 135% in the past two years.

Investors’ beliefs about the retail sector have changed dramatically in the past 2 years.  In examining media optimism data since July 2014, a clear decline is evident. Over the last 24 months, investors became more optimistic about Amazon, but increasingly pessimistic about a number of the top brick-and-mortar retailers (Wal-Mart, Nordstrom, Macy’s, and Best Buy are charted below). The media sentiment of these individual companies are compiled in the Thomas Reuters MarketPsych Indices (TRMI). The TRMI Optimism index represents the frequency of positive, future-tense references about a company verses those that are negative in millions of articles daily from thousands of news and social media sources.  The 200 day-averages of media optimism about each retailer are plotted in the chart below.

What is remarkable is both how long the delusion of bricks-and-mortar retailer safety stayed afloat, and also how quickly it is unraveling as optimism about the individual retailers plummets.  First optimism about Amazon rose, and then, on cue, optimism about bricks-and-mortar retailers declined.

Our new book, Trading on Sentiment:  The Power of Minds Over Markets (Wiley, 2016), explains in detail how media sentiment is quantified and used to time markets and select investments.


How We Know What Isn&39;t So

Throughout the twentieth century, a variety of stock market leading indicators achieved notoriety. The Super Bowl indicator was oft-cited in media.  It was so-called because the U.S. stock market was said to rise in years that an NFL team won the American football Super Bowl. This indicator was 90 percent accurate in predicting the annual stock market direction from 1967 to 1997. However, the Super Bowl indicator is a random coincidence, the result of overfitting to a limited data set.  Such spurious correlations are often repeated in the media and by the statistically illiterate.

As we are seeing in the U.S. election cycle, in politics there is an advantage to sincere assertions of half-truths and lies.  But in scientific disciplines like healthcare and (aspirationally) finance, objective truth is the bedrock of all subsequent activity.  In 2005, Dr. John Ioannidis wrote an academic article that has become the most widely read paper on PLoS One (Public Library of Science) and the first to surpass one million views. The paper contains a proof that the majority of published medical research results are false positives (i.e., untrue).(1) Dr. Ioannidis’s statistical insights have been extended to finance by Marcos Lopez Del Prado, Campbell Harvey, Yan Liu, and others.(2,3,4,5).

If a test result is considered true at a 95 percent confidence interval (two sigma), then that confidence interval must be expanded as additional tests are performed on the dataset to achieve a simile level of confidence that the result is not a random coincidence. Yet with massive data sets available, statistical overfitting is inevitable.

It is tempting to believe in strategies that do not meet solid statistical thresholds because (1) it is difficult to find novel and outperforming investment strategies, and (2) the thrill of thinking one might have found such a strategy is more compelling than the repeated frustration of intellectual honesty. The incentive to find a good result often leads to short-cuts in testing hygiene and spurious correlations.

Essential to identifying useful predictive relationships in data is to adopt techniques to achieve statistical confidence in positive findings.  Also important is to understand the probable rationale – the underlying assumptions – for the findings.  Amidst so much hype, how can we know what is real?


Our Own Trading

“With four parameters I can fit an elephant, and with five I can make him wiggle his trunk.”
~ John von Neumann, a brilliant mathematician who among many other accomplishments founded the field of game theory (8)

While trading MarketPsych’s hedge fund, we adopted numerous datamining hygiene techniques, including: rigorous data exploration of the training set only; using multiple out of sample sets and k-fold cross-validation; utilizing universal concepts and language in our ontologies; visual inspection of output; and using a human filter to exclude strategies that are not empirically supported or based on “common sense.” We are confident in the validity of our statistical hygiene and testing techniques because of these efforts to debias.

However, without real-time performance and common-sense explanations, it is difficult to establish the robustness of quantitative investing strategies. To address these concerns, we have (1) an independently audited track record from our hedge fund, (2) live forward tested strategies launched online in 2013, and (3) empirical support for the validity of our strategies from psychological research. Each of those factors increases confidence, but nonetheless, modeling is very difficult to get right.  Our equity curve is below.

As markets recovered from the financial crisis, our fear-based trading strategy was no longer suited to the positive momentum of prices.  Yet we did not successfully pivot on the strategy, and we shut down the fund.

We have a new strategy being traded currently, and it is adaptive – as media delusions shift, it compensates.  This strategy appears less vulnerable to regime changes, but it’s not open for outside investors yet.

Among traders the most common techniques for establishing the statistical validity of a finding include data division into training/test/out-of-sample sets and k-fold cross-validation.  When data is divided into sets, typically 60% of the data is used for feature selection (identifying the best indicators), while 20% is used for testing to verify that the findings in the training set hold true in data that was “blinded”.  Then once the model has been tweaked and risk management set on the training and testing sets, the model is run on the out-of-sample set to verify that it still holds true.

K-fold cross-validation is another technique for verifying the predictive value of a trading system.  After studying the performance of indicators on an external training set (maybe 30% of the study data), and selecting the best, then the testing set (60%) and training set (90% of alll data) are utilized for cross-validation.  If k = 10%, then the data set is divided into deciles.  The overall model is learned on 90% of the data and tested on 10%.  The 90% and 10% data sets are randomized each pass and dozens of passes are performed.  The range of performance on each 10% set gives an approximation of the model’s stability.  If the model is declared useful, then a final 10% study is performed on the final out-of-sample set to verify the model’s value.

In all cases of developing trading models, it also helps to watch real-time trading on paper first and then to forward-test with a small amount of real money before going live.


Housekeeping and Closing

I met Manny well before the financial crisis while I was working part-time in a prison (to fund the launch of MarketPsych).  His optimistic research tone reflected the mood of the times.  Many of the popular Wall Street delusions are simply beliefs that fit the current social mood.

Eventually I asked Manny, “Do your clients know you’re manic?”  He replied “Of course not!”  He was trying to milk his manic energy for all he could by producing as much research as possible to pay for his legal bills.  I haven’t kept track of Manny, so I don’t know if he saw the financial crisis coming or how his life turned out.  Nonetheless I wish him well.

We love to chat with our readers about their experience with psychology in the markets.  Please send us feedback on what you’d like to hear more about in this area.

Learn more about improving your investment returns with insights from sentiment analysis of the herd in our new book, “Trading on Sentiment:  The Power of Minds Over Markets.”

If you represent an institution, please contact us if you’d like to see into the mind of the market using our Thomson Reuters MarketPsych Indices to monitor real-time market psychology and macroeconomic trends for 30 currencies, 50 commodities, 130 countries, 50 equity sectors and indexes, and 8,000 global equities extracted in real-time from millions of social and news media articles daily.

Keep It Real,
The MarketPsych Team


References

1. J. P. Ioannidis, “Why Most Published Research Findings Are False,” PLoS Medicine 2, e124 (2005), pp. 694–701.
2. M. López de Prado, “What to Look for in a Backtest,” Working paper, Lawrence Berkeley National Laboratory, 2013, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2308682.
3. Harvey and Liu, “Evaluating Trading Strategies.”
4. C. R. Harvey and Y. Liu, “Backtesting,”Working paper, Duke University, 2014a. Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2345489.
5. David H. Bailey, Jonathan M. Borwein, and Marcos Lopez de Prado, and Qiji Jim Zhu, “The Probability of Backtest Overfitting” Journal of Computational Finance (Risk Journals), (February 27, 2015). Available at SSRN: http://ssrn.com/abstract=2326253
6. Attributed to von Neumann by Enrico Fermi, as quoted by Freeman Dyson in “A meeting with Enrico Fermi” in Nature 427 (22 January 2004), p. 297.

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